Probable Problematic Pitfalls in Preparing Prenuptial Agreements
As the use of prenuptial agreements (hereafter “PA”) becomes more widespread, so does the deluge of cases interpreting, enforcing, and invalidating them. The practitioner preparing a PA for a Florida resident or a client who may someday reside in Florida1 must be cognizant of the pitfalls that abound. Some pitfalls should be manifest while others less conspicuous. Ignoring the pitfalls is a recipe for a malpractice claim.2
The (Hopefully) Obvious Pitfalls
Consideration. Often, PAs recite the boilerplate “for good and other valuable consideration” or make no reference to consideration at all. The PA should recite that the marriage is the consideration for it.3 doing so, the practitioner will likely avoid a challenge, as occurred in Akileh v. Elchahal, 666 So. 2d 246 (Fla. 2d DCA 1996),4that there was lack of consideration for the PA.
Full Financial Disclosure. In representing the party seeking to enforce the PA, the practitioner must make sure the client is fully and frankly disclosing to the other party his or her net worth (all assets and liabilities and the values and amounts thereof) and income.5 Too often just assets, and perhaps liabilities, are disclosed. Florida law requires disclosure of income as well.6 Do not rely on income tax returns alone since they do not reflect any nontaxable income. The financial disclosure should be appended to the PA and initialed by the parties so as to prevent or minimize a later claim of nondisclosure.
While the disclosure must be full and frank, it need not necessarily be minutely detailed or exact as to values and amounts. Reasonable approximations “close to” the actual values and amounts may suffice. Even phrases such as “value unknown as of the date hereof,” “exact value unknown,” or “value unknown and undetermined” may be ample7 although it would be wise to make sure the other party had an opportunity to have any assets with the values delineated “unknown” or “undetermined” appraised.8 As the Fourth District recently concluded:
We do not read into Del Vecchio or Casto a requirement imposing a duty. . . to hire an expert to determine a valuation of his interest in [an asset] before the parties could marry. To so hold would mandate that all parties entering into such agreements first obtain a professional appraisal of business or professional interests, even without proof that such appraisal could be accomplished within the time remaining prior to the marriage, and at reasonable cost, and with the data and information available.9
It is advisable when placing values to indicate what the value reflects, e.g., book value, present fair market value, cash value, tax basis, etc. All backup information relating to the assets, liabilities, and income should be made available for review by the other party and the PA should state they were made accessible. If no appraisals are being done, the other side should be given the opportunity to do so and the owning spouse should assert that his or her full cooperation will be given in that respect.
Financial disclosure is not required if the PA makes fair and reasonable provision for the other (usually less pecunious) party or if that party already has a general and approximate knowledge of the character and extent of the other’s assets, liabilities and income.10 A prudent practitioner, however, should not rely on the PA ultimately being interpreted as fair and reasonable or on the other party’s supposed knowledge of the assets, liabilities, and income since such involves the unknown (i.e., how a court will interpret the PA) and problems of proof. Full financial disclosure obviates those potential problems.
Timing of Execution. The practitioner must ensure that the PA is not the product of “fraud, deceit, duress, coercion, misrepresentation, or overreaching.”11 As to duress, the PA should not be sprung on the other party “at the 11th hour.” There is no bright line rule but it appears that one or two days before the wedding is insufficient time but two to three weeks will suffice.
For example, Hjortaas v. McCabe, 656 So. 2d 168 (Fla. 2d DCA 1995), when the husband proposed to the wife in early April 1987 to get married on May 1, 1987, he told her he wanted her to sign a PA. However, the agreement was not drafted until April 28, 1987, and was executed in identical form two days later, the day before the wedding. At that time, no financial disclosures were appended as exhibits and were not in fact created by the husband until a month later. In holding the PA invalid, the Second District observed:
Two days before the wedding [the wife] was presented with a document, the actual terms of which were previously unknown to her and which contained no information about [the husband’s] finances. She had only one day to seek counsel from her own attorney, to make an independent evaluation of the contract, or to cancel her wedding. The only rational conclusion is that her signature was the product of unwarranted compulsion, and the document should have been set aside on that basis.12
In Waton v. Waton, 887 So. 2d 419 (Fla. 4th DCA 2004), the husband discussed with his wife his desire for a PA “long before the agreement was prepared,” and the wife and her attorney received the PA (which the court termed “patently unfair and unreasonable”) two weeks prior to the wedding day. The Fourth District held the PA was executed free of duress. Significantly, in comparing the circumstances in Waton to those in Hjortaas, the Fourth District noted:
We note that the court, in Hjortaas, indicated that if the wife in that case had known of the proposed terms three weeks earlier, when the couple met with the husband’s attorney [and even though there was no financial disclosure], that fact would have made it less likely that she signed under duress.
If economically feasible, videotaping the execution of the PA can prove invaluable later if the PA is challenged. The videotape will evince that the challenging party was there with counsel showing no signs of duress, coercion, etc., an acknowledgement that all of his or her questions were answered with regard to the PA, and that he or she is satisfied with the financial disclosure provided.
Execute Like a Will if Testamentary Provisions. More often than not, a PA involves provisions effective in the event of death as well as divorce. If testamentary terms are involved, the PA must be executed in conformity with the requirements for a will (i.e., it must be signed in the presence of two attesting witnesses).13
Children Provisions Not Binding. Under the doctrine of parens patriae, the provisions in a PA as to child support, custody, visitation, and the like are nonbinding.14 Yet, such provisions find their way into PAs. It makes little sense to articulate unenforceable child support, custody, or visitation provisions. The client may later look to the preparer when the provisions may ultimately be disregarded by the court.
The Not-so-Obvious Pitfalls
Waiver of Alimony. If intended, the PA must expressly waive the party’s right to alimony. In White v. White, 617 So. 2d 732 (Fla. 2d DCA 1993), the Second District observed “we will not permit a prenuptial agreement to waive a right to alimony or support unless that waiver is unambiguously expressed in the agreement.” A general waiver such as “any other right or claim that may otherwise be available” will not suffice.15 The waiver provision should specify all types of alimony, including permanent periodic, rehabilitative, bridge-the-gap, and lump sum.
Waiver of or Offset for Temporary Support and Attorneys’ Fees. Many PAs include provisions whereby one party waives the right to temporary alimony, attorneys’ fees, suit monies, and costs. Under current Florida law, such waivers are not binding on a court16 and the client should be so advised.
Attempting to “get around” the prohibition against waiver of such temporary relief, sometimes a PA will contain an offset provision to the effect that any sums paid (by order or agreement) during the divorce proceeding on account of such temporary relief, will be credited against that which the payor spouse is required to pay under the PA or in a final judgment (such as a lump sum payment). These types of offset provisions have been held to be void ab initio as against public policy.17
Waiver of Interest in Marital Earnings. If the intention is to keep all income and earnings of a party, even those earned during the marriage, as separate, then the PA must specifically so state. Otherwise, income and earnings (such as W-2 wages), and the assets acquired with such income and earnings will be marital subject to equitable distribution.18 However, language such as “each party’s income and earnings during the marriage, and the individual assets acquired with such income or earnings from any source including earnings from employment, labors, or efforts during the marriage, shall constitute that party’s separate property” will be binding.
Waiver of Interest in Appreciation of Separate Property. Typically, one of the most important reasons for a PA is to keep a party’s separate property immune from the other party, including any and all enhancement in value thereof during the marriage. Unless the provision waiving a party’s interest in the enhanced value of the other’s separate property includes active, as opposed to merely passive appreciation, only passive appreciation will be sheltered.19 To avoid this interpretation, the PA could state that a party’s separate property shall include “any and all appreciation or enhancement in value of the party’s separate property, whether such appreciation or enhancement is due in whole or in part to market conditions, inflation, or to the services, skills, financial contributions, or efforts of either party during the marriage.”
Waiver of Interest in Retirement Plans. If the PA is to include a waiver of one party’s interest in the other’s qualified retirement/pension plan(s), the practitioner must be aware of ERISA, REA, and the I.R.C.20 ERISA and REA only allow a “spouse” to elect to waive an interest in the plan(s). Thus, such a waiver in a PA may not be enforceable as the parties were not married at the time the written waiver (the PA) was signed.
To alleviate, or at least attempt to alleviate, this pitfall, the PA should require the nonparticipant party to sign the required waiver(s) after the parties are married. To obviate the eventuality of one spouse failing to do so, one possible remedy is to state that the provision is the essence of the PA and is enforceable by specific performance or mandatory injunction, with the enforcing spouse’s reasonable costs, expenses, and attorneys’ fees to be borne by the noncompliant spouse. Undoubtedly, such litigation during the marriage could make for strange bedfellows. A provision could also be made that if a party fails to comply with the PA by signing the required waiver(s) after the marriage, he or she shall indemnify the participant (or his estate, as the case may be) for any sums received by the nonparticipant.
A line of cases (albeit so far, none in Florida) distinguish between waiving survivor benefits in a plan and waiving marital property rights in a plan. The New Jersey case of Savage-Keough v. Keough, 861 A.2d 131 (N.J. Super. Ct. App. Div. 2004), and the cases cited therein hold for the proposition that although survivor benefits cannot be waived under the terms of a PA, the right to equitable distribution in a divorce can be waived.
Waiver of Interest in Homestead Property. A provision waiving a party’s constitutional right to and interest in a homestead can be waived, but only if it is made knowingly and intelligently.21 Given the strong public policy reasons for the constitutional and statutory homestead protections for families,22 and the obvious fact that most laypersons are unaware of the precise meaning of the homestead protections, the attorney representing the party likely seeking to enforce the waiver should be sure the other is aware of these rights being waived. One way to accomplish this is to spell it out in the PA, such as:
As to “homestead,” if a party is a permanent resident of Florida and owns and resides in a residence in Florida, then that residence will be considered a “homestead.” During the owning party’s lifetime, if the owning party desires to convey the homestead the joinder of his or her spouse is required. The non-owning party agrees to execute any instrument of conveyance at the owning parties’ request. At the owning party’s death, if he or she is survived by a spouse, the surviving spouse is entitled to a life estate in the homestead. The parties acknowledge each understands the rights he and she would have in the homestead and hereby waive these rights.
Income Tax Implications. It is common for a PA to provide for cash payments. Moreover, alimony trusts can be set up in a PA.23 The practitioner should be cognizant of the potential income tax consequences of the cash payment provisions and advise the client accordingly. For example, there could be implications from the excess front loading recomputation rule.24 Furthermore, consideration should be made as to whether it would be advantageous to designate any cash payments nontaxable to the recipient and nondeductible by the payor25 in the event the I.R.S. would consider such payments as taxable under the Code.26
One appellate court required the husband to “reimburse the marital estate” for the income taxes paid from marital earnings and assets toward the income taxes owed and paid on the husband’s separate property.27 To avoid such a consequence, the PA could provide that there will be no credit or “surcharge” in the event marital earnings or assets are used to pay the income taxes on either party’s separate property, unless the intent to do so is expressly stated in a separate written document or agreement.
Some PAs require the parties to file separate or joint federal or state tax returns. Others may mandate the filing of joint tax returns upon the request of either party or the personal representative of the estate of either party. The latter proviso makes sense since it leaves the door open on an annual basis to do whatever is most tax advantageous. In requiring or choosing to file joint tax returns, appropriate indemnifications by one to the other should be provided and each should pay his or her respective share of the aggregate taxes on the basis of their separately calculated taxable income.
Avoid Commingling Problem. Most PAs attempt to shelter a party’s separate property. However, those same PAs also permit one party to transfer or gift separate property to the other. This is a fertile area for inadvertent “commingling.” Commingling or depositing separate funds with marital funds or in a joint account presumes a gift was intended and may transmute the separate funds to marital.28 To avoid this pitfall, provide: “Any commingling or depositing of any and all separate funds or assets with marital (or community) funds or assets, intentional or otherwise, shall not transmute or change its character as separate property unless an intention to do so is expressly stated in a separate written document or agreement.”
Representation by Counsel. While Florida law does not require each party to a PA be represented by counsel,29 it would be wise to insist that the other party at least review the PA with an attorney before executing it. Representation by counsel can be some of the best evidence the party signed the PA voluntarily and knowingly,30 particularly if that attorney successfully negotiated certain favorable changes for his or her client.31
Certainly, one attorney or firm should neither represent nor purport to represent both parties, or give any “advice” to the other party. Counsel must be “independent.” Otherwise, as occurred in Plant v. Plant, 320 So. 2d 455 (Fla. 3d DCA 1975),32 the challenging spouse can argue he or she was given erroneous advice and/or the attorney was actually acting in the best interests of the other party.
It is common practice and not inappropriate for counsel for a party to provide the other party with the names of several attorneys but let the other party make the selection. It may be dangerous to only provide the name of one attorney. Likewise, the “pecunious” party should try to avoid paying the attorney’s fees for the other’s counsel. It simply creates the wrong “appearance” albeit sometimes it cannot be avoided.
Attorneys’ Fees. More often than not, if the PA is ultimately challenged, the preparer will be called to testify as a witness. In such event, not only does that attorney lose the potential client in the divorce action, but he or she may not be compensated at his or her hourly rate for the time necessary to testify. To somewhat alleviate the foregoing concerns, the attorney may want to consider charging more for the preparation and negotiation of the PA than his or her hourly rate would aggregate and provide in a retainer agreement that if ever called to testify regarding the PA, he or she will be compensated at their then hourly rate.33 These concerns should also justify the payment of a reasonable engagement fee.
At best, PAs are just another firewall that are frequently breached or challenged. However, being sensitive to and avoiding these pitfalls will be another brick in enforcing the stability of the wall.
1 Americans are peripatetic. Accordingly, one can never predict when a person will become a Florida resident and be subject to Florida laws concerning PAs.
2 An ABA Family Law Section consensus indicated that many family law practitioners refuse to write PAs because the return is small and the malpractice exposure enormous. See Richard Crouch, ABA’s Fifty States Review Includes Some Surprises: A Special Report from the ABA Family Law Section’s Annual Meeting, Virginia State Bar Publication Family Law News, Vol. 13, No. 3, p.14 (Fall 1993).
3 Akileh v. Elchahal, 666 So. 2d 246 (Fla. 2d D.C.A. 1996) (Marriage itself is sufficient consideration for a PA).
4 Id. See also Viles v. Viles, 610 A.2d 988 (Pa. Super. Ct. 1992) (Letter PA unenforceable where, inter alia, it “does not recite the consideration given in exchange for the agreement”).
5 Del Vecchio v. Del Vecchio, 143 So. 2d 17 (Fla. 1962); Casto v. Casto, 508 So. 2d 330 (Fla. 1987) (involving a postnuptial agreement but is also applicable to PAs); Waton v. Waton, 887 So. 2d 419 (Fla. 4th D.C.A. 2004).
6 Fla. Stat. §732.702(2) provides as to an agreement waiving rights in the event of death, that fair disclosure of a party’s “estate” (assets and liabilities) is required if executed after marriage and no disclosure is required if executed before marriage. Frequently, estate attorneys preparing PAs which include provisions effective in the event of divorce overlook the case law involving divorce requiring disclosure of assets, liabilities and income. See also Weintraub v. Weintraub, 417 So. 2d 629 (Fla. 1982) (Abolishment of disclosure requirement if agreement entered into before the marriage is only applicable in probate context, not divorce context).
7 See Waton, 887 So. 2d 419.
8 It is the “opportunity” and time within which to appraise or value the asset(s) that is important. Rarely will the other party actually appraise the asset(s).
9 Waton, 887 So. 2d 419.
10 Casto, 508 So. 2d 330.
12 See also Lutgert v. Lutgert, 338 So. 2d 1111 (Fla. 2d D.C.A. 1976) (PA invalid where husband sprung it on wife demanding she execute it within 24 hours of wedding); Nelson v. Nelson, 721 So. 2d 388 (Fla. 4th D.C.A. 1998) (PA prepared on the day before the wedding held invalid).
13 See Fla. Stat. §§732.701 and 732.502.
14 Feliciano v. Feliciano, 674 So. 2d 937 (Fla. 4th D.C.A. 1996); Lane v. Lane, 599 So. 2d 218 (Fla. 4th D.C.A. 1992); Margulies v. Margulies, 491 So. 2d 581 (Fla. 3d D.C.A. 1986).
15 White, 617 So. 2d 732.
16 Belcher v. Belcher, 271 So. 2d 7 (Fla. 1972). However, the rule prohibiting waiver of temporaries in a PA has come under fire recently and may be on the verge of abrogation. See Fernandez v. Fernandez, 710 So. 2d 223 (Fla. 2d D.C.A. 1998); Simmers v. Simmers, 851 So. 2d 778 (Fla. 2d D.C.A. 2003); Lashkajani v. Lashkajani, 855 So. 2d 87 (Fla. 2d D.C.A. 2003), rev. granted, 879 So. 2d 622 (Fla. 2004).
17 Urbanek v. Urbanek, 484 So. 2d 597 (Fla. 4th D.C.A. 1986).
18 Irwin v. Irwin, 857 So. 2d 247 (Fla. 2d D.C.A. 2003); Worley v. Worley, 855 So. 2d 632 (Fla. 2d D.C.A. 2003); Witowski v. Witowski, 758 So. 2d 1181 (Fla. 2d D.C.A. 2000).
19 Doig v. Doig, 787 So. 2d 100 (Fla. 2d D.C.A. 2001); Valdes v. Valdes, 29 Fla. L. Weekly D1375 (Fla. 3d D.C.A., June 9, 2004).
20 ERISA (Employee Retirement Income Security Act of 1974, 29 U.S.C. §1055(c)(3); REA (Retirement Equity Act of 1984); I.R.C. (Internal Revenue Code, 26 U.S.C. §417(a)).
21 See Hartwell v. Blasingame, 564 So. 2d 543 (Fla. 2d D.C.A. 1990), approved, 584 So. 2d 6 (Fla. 1991).
22 See City National Bank of Florida v. Tescher, 578 So. 2d 701 (Fla. 1991).
23 See Melvyn B. Frumkes, Frumkes on Divorce Taxation §3.13 (fifth ed. 2004).
24 Under I.R.C. §71(f), if during the first three postseparation years there is impermissible front loading of a cash payment determined under the code to be alimony, the rule could create phantom taxable income to the payor in the third post-separation year (with a like deduction to the payee). See Frumkes, supra note 23, at §3.9); Marjorie A. O’Connell, Divorce Taxation, Research Institute of America, Inc., §3601.
25 Under I.R.C. §71(b), a stream of payments to or on behalf of a spouse or former spouse pursuant to a divorce or separation instrument, whether for support or as part of a property payout, is taxable to the payee and deductible to the payor if the liability for payment ceases upon death of the payee, is not fixed as child support, and so long as “the divorce or separation instrument does not designate such payment as a payment which is not includable in the gross income under [§ 71] and not allowable as a deduction under §215.” A PA is a divorce or separation instrument (See Treas. Reg. 1.71-1(b)(6) Example (2)).
26 See, e.g., Nelson v. Commissioner, T.C. Memo 1998-268 (U.S. Tax Ct. 1998).
27 Livingston v. Livingston, 633 So. 2d 1162 (Fla. 1st D.C.A. 1994).
28 Amato v. Amato, 596 So. 2d 1243 (Fla. 4th D.C.A. 1992); Woodard v. Woodard, 634 So. 2d 782 (Fla. 5th D.C.A. 1994); Robinson v. Robinson, 655 So. 2d 123 (Fla. 3d D.C.A. 1995).
29 Casto,508 So. 2d 330; Cladis v. Cladis, 512 So. 2d 271 (Fla. 4th D.C.A. 1987).
30 See, e.g., Baker v. Baker, 394 So. 2d 465 (Fla. 4th D.C.A. 1981) (that wife “was unrepresented by counsel only underscores the necessity for full compliance with the fiduciary responsibilities inherent in the marital relationship.”); Tenneboe v. Tenneboe, 558 So. 2d 470 (Fla. 4th D.C.A. 1990) (presence or absence of legal representation is a factor).
31 See, e.g., Baker v. Baker, 622 So. 2d 541 (Fla. 5th D.C.A. 1993) (PA valid where, among other things, wife’s attorney successfully obtained change in PA for wife’s benefit). To this end, the practitioner should keep copies of all drafts of the PA and correspondence or memoranda reflecting changes requested and made by both sides.
32 See also McGregor v. McGregor, 447 So. 2d 994 (Fla. 4th D.C.A. 1984).
33 An example is: “If at any time in the future any attorney or employee of our firm is inquired of, deposed, or requested (or subpoenaed) to testify in court or otherwise, with regard to the negotiation, preparation, execution, interpretation or otherwise respecting the Prenuptial Agreement or our services rendered to you, then you shall pay for such attorney and/or employees time at such person’s then hourly rate as well as for all costs incurred including but not limited to travel expenses.”
Melvyn B. Frumkes maintains offices in Miami and Boca Raton, concentrating in high asset and complicated divorce and custody cases. He graduated with honors from the University of Florida College of Law. Mr. Frumkes is a fellow of the American Academy of Matrimonial Lawyers and the International Academy of Matrimonial Lawyers and is a diplomate of the American College of Family Trial Lawyers.
Christopher A. Tiso is an associate with Melvyn B. Frumkes & Associates, P.A. He received his B.B.A. from Siena College in 1982 and his J.D. from Pace University in 1985. Mr. Tiso is admitted to the Florida and New York bars.
This column is submitted on behalf of the Family Law Section, Evan R. Marks, chair, and Kristen Adamson-Landau, editor.